EOG Resources Is How You Play the U.S. Energy Recovery

NEW YORK (TheStreet) -- There may be environmental safety concerns regarding the Keystone XL pipeline project but not  all energy-related companies are risky assets.

Take EOG Resources (EOG). It is far from a bargain at a P/E of 25 but this oil producer is making tons of money while steadily growing its production. Even more impressive is the management, which has established a strong track record of solid decision-making and shareholder returns.

At around $107, EOG stock is up 27% for the year to date, almost tripling the energy sector's 11% gain. Investors have done well. But it's not yet time to cash in.

Even with its P/E of 25 -- though higher than the industry average of 19 -- EOG is growing revenue at almost than two times the industry rate.

All told, EOG remains one of the best-kept secrets on the market -- with a management team that deserves more recognition. With the stock trading at just 16 times 2015 estimates of $6.44, these shares can still make investors money. On the basis of growing cash flow and oil production, EOG should reach $120 in the next 12 months.

In the most recent quarter, revenue jumped 9% year over year, while earnings advanced roughly 5%. From some context, Apache (APA), which is always presumed as better managed, just posted a 18% year-over-year revenue decline (consolidated).

The company's success can be linked back to management's focus on becoming a pure-play oil producer. Requests made for additional details to EOG representatives were not immediately returned.

Still, this decision was a solid move since EOG will have more growth opportunities than if it remained committed solely to natural gas. There are already too many players in that arena, and the margins on natural gas are not as impressive.

What's more, there's EOG has extensive exposure in key Bakken and Eagle Ford shale areas. Management's commitment to production can only increase higher profitability. The only concern is the extent to which shale production will remain at robust levels.

This year alone EOG projects to its production of oil equivalents from 55,000 barrels to almost 300, 000 barrels -- that's growth of more than 400%. There aren't many energy companies willing to boast this much about their capabilities, especially if they don't believe the targets can be reached.

Investors have already benefited from this confidence. Even amid the unpredictable nature of shale production, management is not shy about using capital to reward shareholders for their patience.

The company just raised its quarterly dividend by an additional 34%, bringing the total to$0.1675 per share. On a relative basis, that's a meaningful jump. Management is showing that it's not timid when it comes to future cash flow.

At the time of publication, the author held no position in any of the stocks mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates EOG RESOURCES INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate EOG RESOURCES INC (EOG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, good cash flow from operations, solid stock price performance and increase in net income. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 9.7%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • EOG RESOURCES INC has improved earnings per share by 6.6% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, EOG RESOURCES INC increased its bottom line by earning $4.03 versus $1.05 in the prior year. This year, the market expects an improvement in earnings ($5.69 versus $4.03).
  • Net operating cash flow has slightly increased to $1,934.58 million or 2.31% when compared to the same quarter last year. In addition, EOG RESOURCES INC has also modestly surpassed the industry average cash flow growth rate of -7.19%.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 35.78% over the past year, a rise that has exceeded that of the S&P 500 Index. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 7.1% when compared to the same quarter one year prior, going from $659.69 million to $706.35 million.

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